Image source: RPM International.
The small-cap world is full of companies whose products show up in everyday life. RPM International (RPM -0.75%) makes a variety of coatings, sealants, and adhesives that include popular brand names like DAP and Rust-Oleum.
Yet despite the following that these products have among customers, RPM International investors came into Wednesday morning's fiscal first-quarter financial report with some anxiety, as the stock had fallen to its lowest levels of the year. RPM's results didn't do much to allay those concerns, as weaker-than-expected growth in sales and net income led some investors to flee the stock. Let's take a closer look at RPM International and why it disappointed those who've followed the stock for a while.
RPM International goes through a rough quarter
RPM International did manage to produce better results than in the year-ago quarter, but most of those tracking the company had expected even more. Sales climbed 3.2% to $1.24 billion, but that was quite a bit less than the nearly 6% growth in revenue that investors had anticipated seeing. Net income saw an even more tepid rise of just 0.7% to $99.8 million, and that led to diluted earnings of $0.74 per share, up a penny from a year ago but $0.07 short of the consensus forecast among shareholders.
As we've seen in past quarters, RPM has gotten much different results from its various business segments. The consumer segment saw an 8% drop in revenue, with the strong dollar having an impact of about 3 percentage points on the number, and pre-tax profits for the segment fell by 14%. The industrial segment, which makes up the majority of RPM's overall sales, fared a little better, with greater exposure to foreign currency impacts causing a 4.5% drop in revenue and about a 4% decline in pre-tax income. The new specialty segment saw sales more than double as a result of acquisitions, but currency-neutral organic growth amounted to just 0.6%, and a massive dollar-related hit pulled down sales by 11% even when you take out the impact of acquired businesses.
RPM cited several reasons for the poor performance. In North America, rainy weather during June and early July had a big downward effect on the consumer segment. Elsewhere, the dollar was the big culprit. When you look at the industrial business, currency-neutral sales rose 3% in Europe and 16% in Brazil, but foreign-exchange-related hits of 16 and 37 percentage points, respectively, wiped out those gains in dollar terms.
Nevertheless, RPM CEO Frank Sullivan wasn't inclined to panic. "We expect to gain market share in various categories as the year progresses," Sullivan said, "and believe the weather-related consumer sales shortfall in the first quarter will be picked up in future quarters this year." Sullivan also believes that RPM is in position to move forward with its longer-term strategy despite some of the headwinds the company has faced lately.
What's next for RPM International?
In particular, Sullivan believes that a continued emphasis on acquisitions will help RPM do better in a highly fragmented industry. The specialty segment will boost overall results, and RPM believes that it will have greater access to capital going forward to finance expansion plans and future buyouts.
Nevertheless, RPM's near-term guidance remained cautious. The company believes that industrial segment sales will rise by low-single-digit percentages due to the strong dollar, while consumer segment revenue will rebound with gains of 5% to 7% for the rest of fiscal 2016.
Weak foreign currencies will eat up organic growth in the specialty segment, but the underlying fundamental health of the business will remain intact. Earnings guidance of $2.50 per share is less than the current consensus forecast of $2.56, but it reflects the greater-than-expected challenges that RPM faces, and Sullivan has faith that "our great entrepreneurial businesses are competing and winning with solid growth in constant dollars in every region of the world."
RPM shareholders weren't overly disappointed with the company's results, as shares fell a bit more than 1% in the first hour of trading following the announcement. In the long run, RPM International simply needs to make up for short-term factors and continue its growth strategy to find new opportunities worldwide. If it can succeed, then RPM's recent share-price weakness could reverse itself quickly.
